Apr 08

I find the concept of the credit score to be very interesting. It’s a single number which to a degree is an indicator of how good a credit risk you are to a lender.

Yet, in some sense, it tells as little about an individual as a high school grade point average does. I graduated high school with an A average. On a number scale this was 90% or greater. Yet, I barely passed language and social studies. My math and science grades were always mid to high 90’s and that’s what brought up my average. In senior year when I needed just 4 classes to graduate, I took 7, 4 of which were math and science in a calculated effort to get my overall average where I wanted. Gym? The gym teacher had one rule – football players got an A, everyone else got a B if they showed up. In senior year, I wised up, I told the football coach I’d tutor his team in math if he’d recommend me for an A in gym. But I digress.

Your Credit Score (otherwise known as FICO score) ranges from 300-850. Let’s take a look at what impacts your score. Payment history, or on-time payment stands to reason. If you have a track record of paying your bills on time, you are more likely to continue doing so. Length of credit history is a tough one. I’ve had credit for 30 years now, yet when I look at my report card as offered by Credit Karma, I find that my average age of open credit lines is only 6 years 4 months. My oldest account is only 13 years 5 months old, and I suspect it’s for my original mortgage on the house we’re in. It was refinanced and 10 years after closing it will fall off the report. This component of the score is the one that has me shaking my head a bit. It would seem that getting rid of old cards you don’t use should be a good thing, it both reduces the risk of a card getting lost or stolen, and it simplifies your finances. If you have multiple cards, more than you think you’ll ever need, it’s a good idea to check your credit score first and cancel them slowly, one by one, to be sure you are not impacting your score too badly.

Amounts owed refers to the percent credit utilization. When I checked mine I found a 6% utilization, but only because I have some pretty high limits. Even though I pay all charges in full every month, if I only had one card and it had a $5000 limit, charging $3000 each month would be a negative. Just like my average high school grades didn’t reflect any one strength, card utilization doesn’t show whether the debt is the same every month or paid in full. With such a low percent used, I’ve nothing to worry about, but I’m curious if I can impact that by paying the bulk of the amount owed just before the bill is cut. If I do that, I’ll update and let my readers know how that worked out. I imagine the card issuers are not reporting real time or mid cycle, but I may be wrong there.

A few points may not impact your cost of borrowing, unless the score is low to begin with and those point bring you over the next threshold. If a loan is in your future, better to take a look at your credit score now and work to improve that score before applying for the loan. Thew lower rate you’ll get will be worth the effort.

Joe

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May 26

President Obama signed the Credit Card Reform act (officially called the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009) last week and I’d like to offer my thoughts. First, let’s review the rules that will be put into place under this legislation:

  1. Institutions would be prohibited from treating a payment as late unless the consumer has been given a reasonable amount of time to make that payment. A safe harbor provision suggests that statements must be mailed 21 days in advance of the account’s due date. If the due date occurs on a day the postal service doesn’t operate, the payment may not be considered late if received on the next business day.
  2. When different interest rates apply to different balances, payments must be allocated according to a new method. The bank wil no longer be permitted to apply the entire payment only to the lowest interest balance.
  3. Banks would be prohibited from increasing the interest rate on existing balances. This doesn’t apply in the case of a variable rate tied to an index, nor the expiration of a teaser rate.
  4. Banks may not assess an over the limit fee due solely to a hold placed on available credit.
  5. Banks would be prohibited from double-cycle billing, i.e. calculating interest due based on prior months’ balance.
  6. Banks would be prohibited from financing security deposits or fees for the issuance or availability of credit if those deposits or fees ulitize the majority of available credit on the account.
  7. Banks making firm offers of credit advertising multiple annual percentage rates or credit limits would be required to disclose in the solicitation the factors that determine whether a consumer will qualify for the lowest annual percentage rate and highest credit limit advertised.

These are the major points contained in the 269 page pdf, available from the treasury web site (Note – The document may not open in some vbrowsers, right-click if you wish to download and read it). Now, let’s look at what isn’t addressed and the unintended consequences of this legislation:

  1. Grace periods – there is nothing here to stop banks from charging on one’s daily balance (as banks do with HELOCs.) As banks feel the squeeze on their bottom line, it would be simple to do away with grace periods entirely, and any use of one’s card would accrue interest.
  2. Annual Fees – I have a number of credit cards, all of which I pay in full each month, so the interest rate is of little concern so long as the grace period is in effect. The only card that carries an annual fee is the one that offers me airline miles. I suspect that moving forward, few cards will offer no annual fee.
  3. Reduced rewards – One card I carry offers a 2% rebate into a 529 (college saving) account. With no fee, this card is a no brainer to use. I’ll expect a letter soon that the reward percentage is being reduced.
  4. Reduced/Canceled credit lines. Self-explanatory, but perhaps the worst of the potential results. Remember, as I discussed some time ago, your Credit Score (FICO) is made of of multiple factors, one of which is credit utilization (the percent of your outstanding line used). So, you may only owe $3000 on a card with a credit line of $10000, and think all is well. But the bank then reduces your available limit to $5000, and now your percent used has doubled, possibly impacting your credit score.

This is one story I am certainly going to follow, as we all have an interest (pun intended) in its outcome.

Joe

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